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Title:: Market Demand and Iron and Steel Industry Capacity Configuration:An Analysis of the Asymmetric Dynamic Adjustment Mechanism

Keywords:: market inducement; asymmetric effect; capacity adjustment mechanism; time-varying parameter model

Abstract:: Taking iron and steel industry as an example, this paper aims to explore the market demand’s effect on and its mechanism for the investment and capacity allocation. Based on building a theoretical model containing a dynamic gap in demand according to the quarterly data of iron and steel industry since 2003, we employed the time-varying parameter model to test the asymmetric adjustment mechanism for the capacity allocation induced by demand. The results show obvious asymmetric features in the formation and exit phases of iron and steel productivity, which are caused by demand-induced dynamics and its asymmetric periodic motion; self-correction made by the mechanism of productivity under the influence of frequent shifts between supply and demand is limited; once the deviation from the equilibrium level of production capacity goes beyond the threshold of the adjustment mechanism, it is unable to restore equilibrium through market regulation, thus leading to the huge “trial and error” cost. Grasping the above rules accurately is the precondition for achieving market’s decisive role in the resource allocating process and at the same time for giving full play to government function.